The Essential Terms of the New--And Now Suddenly More Likely to Pass--Chapter 13 Mortgage Cramdown Bill

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



This Bankruptcy Bulletin presents the core cramdown provisions of Senate Bill 61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, following up on last Thursday's dramatic announcement of Citigroup's new support for the bill. See my Bulletin of last Friday on this break-through agreement between the Senate Democratic leadership and Citigroup.

(Tomorrow's Bulletin presents other very important and less publicized provisions of the bill, including a major indirect expansion in the Chapter 13 jurisdictional limits for secured and unsecured debt (Section 109(e)), detailed new rules governing post-petition fees of mortgage creditors (Section 1322(c)), as well as the concessions made to Citigroup to gain its support.)

Senate Bill. 61, and its companion bill in the House, H.R. 200, were introduced on the floor of the Senate and House last Tuesday, 1/06/09, but as of this last weekend the text of of the bills had not been received from the Government Printing Office by the Library of Congress, and no summary of the bills had yet been prepared. However the text of S. 61 was printed in the Congressional Record upon its introduction and so is accessible there.


The Core of the Bill: Amendments to Section 1322(b)

Although many parts of the bill are the same or very similar to its versions introduced and debated in the prior Congress (see S. 2136 of the 110th Congress), the current bill takes a different, and very much broader approach in its core cramdown provision. Whereas in the last session mortgage modification was limited to debts "secured by a nontraditional mortgage, or a subprime mortgage, and any lien subordinate to such claim, on the principal residence," now modification is expanded to any "loan secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced." (See the end of this Bulletin for the portion of the bill on the Section 1322(b) amendments.)

And there is no budgetary limitation: in an amended form of last year's bill, a debtor had to show through their monthly budget "insufficient remaining income to retain possession of the residence by curing a default and maintaining payments." That is no longer a condition for mortgage modification (although other budget-related provisions in Chapter 13 arguably accomplish that in practice, at least in many situations).

The most important provision, the cramdown: new subsection 1322(b)(11)(a) permits a Chapter 13 plan to provide "for payments of the amount of the allowed secured claim as determined under section 506(a)(1)." Section 506, entitled "Determination of secured status," includes subsection (a)(1), the well-known provision which provides for the bifurcation of an undersecured claim into secured and unsecured portions--with the secured portion determined by "the extent of the value of such creditor's interest in the estate's interest in such property."

With adjustable rate mortgages, this bill allows the plan to prohibit, reduce, or delay "adjustments to such rate of interest applicable on and after the date of filing of the plan." Note that this seems to preclude "prohibiting, reducing, or delaying" PRE-PETITION interest rate increases--that is, debtors appear stuck with the interest rate as of the date of filing, but subsequent language in the bill--discussed immediately below--seems clearly to allow interest rate adjustments, for all principal residence mortgages regardless whether fixed or adjustable rate.

Post-petition interest may be modified to a new rate, using the same language as last year, determined as follows:

an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk . . . .

The mortgage repayment period may be modified

to extend the repayment period for a period that is no longer than the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter

This is substantively similar to last year's bill, but with the significant increase from the prior 30 to now 40 year maximum.

The final change in Section 1322(b)(11) is subsection (D) stating that the plan may provide "for payments of such modified loan directly to the holder of the claim," that is, such payments need not be paid through the Chapter 13 trustee.

There is a very timely discussion of this specific issue by Katherine Porter, associate professor at the University of Iowa law school (and former associate at Stoel Rives LLP in Portland, Oregon in its bankruptcy and creditors' rights group), in an article from just last Friday entitled Cramdown Controversy #1--Who Do I Pay? She asserts that "[t]he pending legislation contains language that would require the payments on mortgages modified in bankruptcy to be made 'directly to the holder of the claim.' " And she concludes: "I think debtors should have the option of making payments on a modified mortgage either directly to the mortgage company or through the trustee, as is currently the practice."

Query: By my reading (see below), Section 1322(b)(11)(D) permits but does not require direct payments to cramdown mortgage creditors. What is Porter seeing that I'm missing?

Senate Bill 61's Amendments to Section 1322(b)
For reference, here is the portion of Senate Bill 61 directly pertinent to the new Section 1322(b)(11):

[T]he [Chapter 13] plan may--

(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a loan secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced, modify the rights of the holder of such claim—

(A) by providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1);

(B) if any applicable rate of interest is adjustable under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan;

(C) by modifying the terms and conditions of such loan—
(i) to extend the repayment period for a period that is no longer than the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter; and
(ii) to provide for the payment of interest accruing after the date of the order for relief under this chapter at an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and

(D) by providing for payments of such modified loan directly to the holder of the claim.

Again, tomorrow's Bulletin will present the other very important and less publicized provisions of Senate Bill 61, including an expansion in the Chapter 13 jurisdictional limits, new rules governing the allowance of post-petition fees by mortgage creditors (Section 1322(c)), as well as the three conditions agreed to with Citigroup (which have not yet been included in an amendment of S.61.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

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